• Mixed 9MCY23 results. Out of the 9 companies under our coverage, 5 were in line whereas 4 fell short (Exhibit 2). Among the developers, 5 recorded a YoY decline in 9MCY23 results, while 4 demonstrated improved bottom line (Exhibit 2). The following are the salient highlights of the companies’ 9MCY23 performance:
  ➢ The core net profits of Sunway, Mah Sing, IOI Properties (IOIProp), Sime Darby Property (SimeProp) and Paramount came in within expectations.
  ➢ Lagenda, UEM Sunrise (UEMS), S P Setia (Setia) and Glomac reported earnings below expectation for 9MCY23. Lagenda’s revenue fell short due to slower-than-expected launches in 9MFY23. UEMS’ earnings missed our estimate, attributed to lower-than-expected revenue from the tail end of ongoing projects, as well as higher-than-expected operating costs of new project launches. Setia’s earnings were impacted primarily by delayed recognition of revenue from UNO Melbourne. Glomac’s YoY earnings were lower due to increased construction cost, higher finance expense and higher mix of low margin projects.
  ➢ QoQ, the developers’ earnings exhibited a mixed pattern, with 5 developers posting stronger earnings and 4 experiencing weaker earnings. Lagenda and SimeProp recorded improved earnings QoQ, primarily driven by higher sales and improving on-site development activities. Meanwhile, Sunway’s earnings were 23% higher QoQ due to the recognition of a lumpy development profit of RM46mil from its Singapore property development project. QoQ, Mah Sing’s earnings expanded 6% despite a flattish revenue, attributable to narrower losses from its glove-making operation. For IOIProp, the stronger QoQ earnings were mainly attributed to a higher share of results from joint ventures due to reversal of inventories previously written down.
  ➢ UEMS’ earnings were weaker QoQ due to lower recognition of land sales in 3QFY23 at RM31mil vs. RM69mil in 2QFY23. QoQ, Setia incurred higher administrative costs associated with the commencement of hotel business as well as some cost savings realised from completed projects in 2QFY23. Paramount witnessed weaker QoQ sales in 3QCY23, coupled with lower core net profit margin as a result of higher savings from the cost finalisation of some projects in 2QFY23. Meanwhile, Glomac experienced higher QoQ finance cost together with a 63% decline in sales from slower new projects launched in FY23.

• Developers are on track to achieve their sales target in FY23F. In 9M2023, most of the developers’ sales (except SimeProp) have shown significant improvement, with an average YoY growth of 31%. This was supported by higher launches (2.2x YoY) in 2023. In 9M2023, developers are progressing well toward achieving their sales targets, attaining 76%–120% of their FY23F sales target (average of 92%) vs. 49%–106% for sales in 9M2022 to FY22 (average of 72%) (Exhibits 4-5). However, SimeProp reported a 9% YoY decline in 9MFY23 sales due to lower sales for its already launched project. Notably, SimeProp’s new launches was lower in FY22 at RM2.6bil vs. RM3.7bil in FY21. Meanwhile, UEMS has surpassed its FY23F sales target by 20% given the recognition of en bloc sales of its Collingwood project valued at RM874mil in Australia. Most of the developers are confident in meeting their targeted FY23F sales target, backed by upcoming launches in 4QCY23.

• New launches were largely in line. There has been a significant 2.2x YoY rise in new property launches (for those under our coverage) in 9MFY23 with a total gross development value (GDV) of RM14.9bil vs. RM6.8bil in 9MFY22 (Exhibit 7). The majority of the developers are on track to achieve their FY23F targeted launches, attaining an average of 77% of their FY23F targeted launches. However, Lagenda and Setia fell short of expectations as they are currently prioritising the clearance of unsold units for existing projects.

• Remain OVERWEIGHT on property sector. Moving forward, we expect a gradual recovery in property transaction volumes on improved market sentiments and stronger demand, aided by our economist’s estimated 2024F gross domestic product (GDP) growth of 4.5% and stronger employment prospects. Transaction activities for residential property are expected to see further improvement (Exhibits 9-10), in line with the government’s effort to increase more affordable houses as outlined under the 12th Malaysia Plan Mid-Term Review and MADANI Neighbourhood scheme. In addition, the implementation of New Industrial Master Plan (NIMP), designed to boost investments into the country, is anticipated to bolster demand for industrial properties. Meanwhile, Kuala Lumpur Property Index is still trading currently at an attractive price-to-book value ratio of 0.5x, 1 standard deviation below its 10-year median of 0.7x (Exhibit 13).

• Our top BUY is Sunway (FV: RM2.40) given the strong brand recognition established by its highly successful landmark developments and expanding healthcare business, supported by substantive unbilled sales and outstanding order book. We like Mah Sing (FV: RM0.98) for its strength in affordable housing developments at strategic locations as well as savvy execution and quick-turnaround business model. We also like IOI Properties (FV: RM2.05) due to the anticipated substantial contributions from recurring income of IOI Central Boulevard upon its completion by FY24F, along with launches of other major projects in Singapore, namely Marina View with a huge GDV of SGD2.6bil (RM8.6bil).

• Key risks for the sector: i) Stagflation which could lead to higher unemployment alongside accelerated inflation, posing downside risks to property demand, and ii) Escalation of geopolitical tensions could disrupt global trade and supply chains, which will impact the pace of economic recovery and heighten the cost of building materials.

Source: AmInvest Research - 1 Dec 2023